Financial realities of sustainability dawns on European market

M&A activity and development activity in the European hotels sector is being held back by cash requirements growing from burgeoning obligations to invest in sustainability and environmental, social, and governance concerns, panelists said during a webinar hosted by HVS.

Several speakers appearing on the 20th quarterly HVS-led webinar, entitled “Unlocking the Potential of the Hotel Sector”, addressed the issues.

Graeme Smith of AlixPartners said business plans are being adjusted to take account of “the need to invest for things like energy efficiency and other aspects of ESG.”

Sustainability obligations, said Smith, are creating a “log jam on transactions” though he also said that shifting interest rate expectations and consumer demand contribute to uncertainty around the outlook for financial returns.

Investors are just not going to be interested in an asset or a company unless it is well down the line on sustainability and the problem is, it is expensive and if you are playing catch up it is even more expensive.

Russell Kett

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New environmental regulations emanating from the European Commission are one focus of attention for hotel investors and operators. The pan-European carbon trading scheme, essentially designed to reduce greenhouse gas emissions, is to encompass buildings such as hotels in 2025 and become fully operational in 2027.

Ian Livingstone, executive co-chairman of London+Regional Properties, the private hotel owner and operator with 118 assets, said, “It’s going to be harder to operate non-sustainable hotels and harder to finance them.”

“Sustainability is increasing in relevance. It is not easy to get to and it’s expensive,” said Livingstone.

He said it is easier to achieve with new builds and during substantial refitting, but added, “If you have an old hotel I don’t know how you do it in a cost effective way. It’s very, very tricky.”

Livingstone was downbeat about the quality of assets his business was seeing coming up for sale. Assets on the distressed side, he said, have often had capital expenditure withheld because of COVID and other cashflow issues and such deals are hard to finance.

He said that his firm is interested in the private credit space where “gaps are appearing between where banks and credit funds want to operate, and where people want to get to refinance their businesses.”

Karen Friebe, head of Hotels, Hospitality and Leisure at Bird & Bird, said, “You can’t do anything at the moment without sustainability coming up as a topic.” Closer attention, she said, was being paid to the way management agreements reflect stakeholders’ wishes to address sustainability.

Jan Hazelton of the luxury hospitality group Kerzner International said that development is “much more difficult today” and that it is putting its own capital into deals and projects to get them off the ground.

David Kellett of institutional investor Invesco Real Estate said, “ESG expenditure is inflationary and it will be felt across the whole industry.”

Russell Kett, the chairman of HVS, said that four years ago, when the HVS webinar series began, the industry was paying little more than “lip service” to the issue of sustainability. “Now,” he said, “ignore it at your peril.”

“Investors are just not going to be interested in an asset or a company unless it is well down the line on sustainability and the problem is, it is expensive and if you are playing catch up it is even more expensive,” Kett added.

He also said that investment in sustainability was necessary because younger people – so called  Gen Z customers, employees and investors – want the issues resolved.